A deed in lieu of foreclosure is a loss mitigation (foreclosure avoidance) alternative, along with brief sales, loan adjustments, payment strategies, and forbearances. Specifically, a deed in lieu is a transaction where the homeowner voluntarily title to the residential or commercial property to the holder of the loan (the bank) in exchange for the bank agreeing not to pursue a foreclosure.
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Most of the times, completing a deed in lieu will release the borrower from all responsibilities and liability under the mortgage contract and promissory note.
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How Does a Deed in Lieu of Foreclosure Work?
Deficiency Judgments Following a Deed in Lieu of Foreclosure
Mortgage Release Program Under Fannie Mae
Should You Consider Letting the Foreclosure Happen?
When to Seek Counsel
How Does a Deed in Lieu of Foreclosure Work?

The initial step in getting a deed in lieu is for the debtor to request a loss mitigation package from the loan servicer (the company that manages the loan account). The application will need to be completed and sent along with paperwork about the debtor's earnings and expenses including:

- proof of income (generally 2 recent pay stubs or, if the customer is self-employed, a profit and loss statement).

• recent income tax return.
• a monetary declaration, detailing month-to-month earnings and expenditures.
• bank statements (generally 2 current declarations for all accounts), and.
• a hardship letter or challenge affidavit.
  
  What Is a Challenge?
  
  A "difficulty" is a circumstance that is beyond the borrower's control that results in the customer no longer being able to afford to make mortgage payments. Hardships that receive loss mitigation factor to consider include, for instance, job loss, reduced income, death of a spouse, illness, medical expenditures, divorce, rate of interest reset, and a natural catastrophe.
  
  Sometimes, the bank will require the debtor to attempt to sell the home for its reasonable market worth before it will consider accepting a deed in lieu. Once the listing period ends, assuming the residential or commercial property hasn't sold, the servicer will purchase a title search.
  
  The bank will typically only accept a deed in lieu of foreclosure on a very first mortgage, implying there should be no extra liens-like second mortgages, judgments from creditors, or tax liens-on the residential or commercial property. An exception to this general rule is if the very same bank holds both the first and the 2nd mortgage on the home. Alternatively, a borrower can pick to pay off any extra liens, such as a tax lien or judgment, to facilitate the deed in lieu transaction. If and when the title is clear, then the servicer will schedule a brokers cost opinion (BPO) to determine the reasonable market price of the residential or commercial property.
  
  To complete the deed in lieu, the debtor will be needed to sign a grant deed in lieu of foreclosure, which is the file that transfers ownership of the residential or commercial property to the bank, and an estoppel affidavit. The estoppel affidavit sets out the regards to the arrangement between the bank and the borrower and will consist of a provision that the borrower acted easily and voluntarily, not under browbeating or duress. This document may also consist of arrangements addressing whether the deal is in complete satisfaction of the financial obligation or whether the bank has the right to seek a shortage judgment.
  
  Deficiency Judgments Following a Deed in Lieu of Foreclosure
  
  A deed in lieu is typically structured so that the transaction satisfies the mortgage financial obligation. So, with a lot of deeds in lieu, the bank can't get a shortage judgment for the distinction between the home's reasonable market price and the financial obligation.
  
  But if the bank wishes to preserve its right to look for a shortage judgment, a lot of jurisdictions permit the bank to do so by clearly mentioning in the transaction documents that a balance remains after the deed in lieu. The bank typically requires to define the quantity of the shortage and include this quantity in the deed in lieu files or in a different arrangement.
  
  Whether the bank can pursue a shortage judgment following a deed in lieu also sometimes depends upon state law. Washington, for example, has at least one case that states a loan holder might not get a deficiency judgment after a deed in lieu, even if the consideration is less than a full discharge of the financial obligation. (See Thompson v. Smith, 58 Wash. App. 361 (1990) ). In the Thompson case, the court ruled that because the deed in lieu was successfully a nonjudicial foreclosure, the borrower was entitled to protection under Washington's anti-deficiency laws.
  
  Mortgage Release Program Under Fannie Mae
  
  If Fannie Mae owns your mortgage loan, you might be eligible for its Mortgage Release (deed in lieu) program. Under this program, a debtor who is qualified for a deed in lieu has 3 choices after completing the deal:
  
  - vacating the home immediately.
• getting in into a three-month transition lease with no lease payment required, or.
• participating in a twelve-month lease and paying rent at market rate.
  
  For more information on requirements and how to take part in the program, go here.
  
  Similarly, if Freddie Mac owns your loan, you might be qualified for an unique deed in lieu program, which might include relocation assistance.
  
  Should You Consider Letting the Foreclosure Happen?
  
  In some states, a bank can get a deficiency judgment against a house owner as part of a foreclosure or after that by filing a separate lawsuit. In other states, state law prevents a bank from getting a deficiency judgment following a foreclosure. If the bank can't get a shortage judgment versus you after a foreclosure, you might be better off letting a foreclosure take place rather than doing a deed in lieu of foreclosure that leaves you responsible for a shortage.
  
  Generally, it may not deserve doing a deed in lieu of foreclosure unless you can get the bank to concur to forgive or minimize the shortage, you get some money as part of the transaction, or you receive extra time to remain in the residential or commercial property (longer than what you 'd get if you let the foreclosure go through). For specific guidance about what to do in your specific situation, talk with a local foreclosure lawyer.
  
  Also, you should consider how long it will require to get a new mortgage after a deed in lieu versus a foreclosure. Fannie Mae, for circumstances, will buy loans made two years after a deed in lieu if there are extenuating scenarios, like divorce, medical bills, or a task layoff that caused you economic problem, compared to a three-year wait after a foreclosure. (Without extenuating circumstances, the waiting period for a Fannie Mae loan is seven years after a foreclosure or 4 years after a deed in lieu.) On the other hand, the Federal Housing Administration (FHA) deals with foreclosures, brief sales, and deeds in lieu the very same, usually making it's mortgage insurance coverage offered after three years.
  
  When to Seek Counsel
  
  If you need assistance understanding the deed in lieu process or interpreting the documents you'll be required to sign, you need to consider speaking with a qualified attorney. A lawyer can likewise assist you work out a release of your individual liability or a minimized deficiency if essential.